Exemptions that can be availed in lease accounting

Exemptions

A lessee can avail exemption in respect of the following items:

  1. short-term leases
  2. leases for which the underlying asset is of low value
  3. If a lessee elects not to apply then the lessee should recognise the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis
  4. The lessee should apply another systematic basis if that basis is more representative of the pattern of the lessee’s benefit

Short term lease

If a lessee avails short-term leases exemption, the lessee should consider the lease to be a new lease for the purposes of Ind AS 116 if:

  1. there is a lease modification or
  2. there is any change in the lease term
  3. The election for short-term leases should be made by class of underlying asset to which the right of use relates.
  4. A class of underlying asset is a grouping of underlying assets of a similar nature and use in an entity’s operations.

Low value underlying asset

To avail low value underlying asset exemption, the following conditions should be satisfied:

  1. the lessee can benefit from use of the underlying asset on its own or together with other resources that are readily available to the lessee and
  2. the underlying asset is not highly dependent on, or highly interrelated with, other assets.

Question:

Entity A is in the business of manufacturing and selling Computer gadgets and has entered into the following lease arrangements as lessee: Does this qualify as Low value lease?

Leases of high-end servers, including many individual modules that increase the storage capacity of those servers. The modules have been added to the mainframe servers over time, as Lessee has needed to increase the storage capacity of the servers.

Option A: True

The lessee can benefit from use of the underlying asset on its own or together with other resources that are readily available to the lessee

Leases of modules do qualify as leases of low-value assets. This is because, although an individual module might be an asset of low value, each module is highly interrelated with other parts of the servers. The entity would not lease the modules without leasing the servers

Option B: False

The lessee can benefit from use of the underlying asset on its own or together with other resources that are readily available to the lessee

Leases of modules do qualify as leases of low-value assets. This is because, although an individual module might be an asset of low value, each module is highly interrelated with other parts of the servers. The entity would not lease the modules without leasing the servers

Not low value underlying asset

  • Does not qualify as a lease of a low-value asset if the nature of the asset is such that, when new, the asset is typically not of low value
  • For example, leases of cars would not qualify as leases of low-value assets because a new car would typically not be of low value
  • If a lessee subleases an asset, or expects to sublease an asset, the head lease does not qualify as a lease of a low-value asset
  • Examples of low-value underlying assets – tablet and personal computers, small items of office furniture and telephones
  • Note: The election for leases for which the underlying asset is of low value can be made on a lease-by-lease basis

Low value when it is new

  • A lessee should assess the value of an underlying asset based on the value of the asset when it is new, regardless of the age of the asset being leased
  • The assessment of whether an underlying asset is of low value is performed on an absolute basis
  • Leases of low-value assets qualify for the exemption regardless of whether those leases are material to the lessee
  • The assessment is not affected by the size, nature or circumstances of the lessee. So, different lessees are expected to reach the same conclusions about whether a particular underlying asset is of low value.

Asset is not a low value-underlying asset

  • If a lessee subleases an asset, or expects to sublease an asset, the head lease does not qualify as a lease of a low-value asset
  • A lessee should assess the value of an underlying asset based on the value of the asset when it is new, regardless of the age of the asset being leased
  • The assessment of whether an underlying asset is of low value is performed on an absolute basis
  • Leases of low-value assets qualify for the exemption regardless of whether those leases are material to the lessee

The assessment is not affected by the size, nature or circumstances of the lessee. So, different lessees are expected to reach the same conclusions about whether a particular underlying asset is of low value.

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